Understanding Debt Consolidation
Debt consolidation is the process of taking out one big loan to pay off many others. It’s the act of grouping all your bills into one combined debt. It is a legitimate tactic for managing one’s debt but it’s only helpful if done under the right circumstances. Dealing with mortgages, car loans, student loans and other debts can be daunting. However if you can combine all those expenses together under a lower interest rate, you will end up making lower payments.
Types of debt consolidation
Standard debt consolidation loan: This involves getting a loan from a bank, peer-to-peer lender or a credit union, which agrees to consolidate all your debts into a single new loan. It mostly involves the credit card balances. This kind offers the benefit of a lower interest rate hence less payments.
Home equity loan: This entails borrowing a loan against the value of your home to pay off your credit cards or other debts. It is available only to people who already have a mortgage. This loan charges less interest. However, it comes with the risk of losing your home if you are able to pay back.
Balance transfer offers: It entails transferring all your credit card debt onto one new card. This offers one an introductory 0% interest period of 12 to 18 months, hence helpful if one can pay the debts within that period.
Student loan consolidation: This differs from a standard consolidation loan in that one may borrow a student loan consolidation form the federal government. The advantage of this kind is that the government offers low interest rates and flexible repayment schedules.
Factors to consider before obtaining a debt consolidation loan
Consolidating debts helps you not only to pay your debts at a lower interest rate but also to improve your credit in the long run. However, before taking out a debt consolidation loan, there are a number of factors you need to consider.
Options on consolidation loan: There are many ways that you can consolidate your debts. You can decide to take out a secured consolidation loan or an unsecured depending on your level of comfort-ability.
Eligibility requirements: There are various eligibility requirements for one to get a debt consolidation loan. You need to have a good rating for you to be able to take out a new loan.
Promotional Terms and Restrictions: One should read and completely understand any promotional materials about the debt consolidation loan.
Fees: One should also consider the fees and additional expenses to be incurred in the process of consolidating one’s debts.
Mistakes to avoid: The most common mistake involves timing. You should never start missing the payments since this will result to increased debts and lower credit score.
Finding a reputable debt consolidation company
After deciding to take out a debt consolidation loan, you will need to identify a reputable debt consolidation company. The first step involves contacting your local credit unions and banks to find out what interest rates they can offer you. Then compare those rates to see the most attractive deal. Watch out and don’t rush in making your decision.